As the world grapples with the devastation wreaked by the coronavirus pandemic, budgetary pressures have reignited heated debates over the efficacy of foreign development aid. The United Kingdom, Australia, Japan, and Saudi Arabia have already scaled back their aid packages, a sign of what may soon become a global trend.
But this is a misguided approach with far-reaching consequences, especially during a pandemic. When foreign aid is awarded effectively and shielded from the grasp of greedy governments, it can help improve living conditions and lay the groundwork for sustainable development. Now more than ever, donor countries must radically reevaluate how they deliver aid—not stop providing it.
Foreign assistance is especially essential in Africa, a continent that is home to 67 percent of the world's poor. With surging COVID-19 infection rates and a death count that has surpassed 200,000, the continent is facing converging health and economic crises. Many African countries are currently experiencing their first recessions in 25 years, largely the result of reduced foreign direct investment, remittances, tourism, and commodity exports.
In recent months, Tunisia, South Africa, Nigeria, and Senegal have all been engulfed in pandemic-related social unrest. As countries wrestle with these issues, development assistance might be the best way of safeguarding several decades of development progress and alleviating widespread poverty.
Providing aid also benefits rich donor countries, if for no other reason than it quells global instability and mass migration pressures. With the world's fluid borders, one country's crisis can quickly become another's. To avoid confronting these outcomes, it is in the interest of donor countries to support poorer countries facing domestic challenges.
It is time for a radical reassessment of development aid and how it is best delivered.
But as the pandemic has made clear, it is time for a radical reassessment of development aid and how it is best delivered. Due to the pressures of COVID-19, the amount of aid that donor countries offer recipients has already dropped. Britain, for instance, announced it will temporarily cut its aid budget by about $5.5 billion in 2021, a move that could clear a path for other countries to follow.
These budget cuts are coming at a time when international aid targets are already egregiously low. In 1993, the United Nations set a target for countries to spend just 0.7 percent of their gross national income (GNI) on official development assistance—a low bar that the vast majority of donor countries are not even meeting.
As the fallout from the 2020 global recession trickles into late 2021 and 2022, there will likely be greater reductions in future aid flows. The mechanistic link of aid outlays to national income suggests that as GNI falls during the pandemic, aid spending falls, too. Such an outcome could be devastating: Experts believe that aid cuts harm essential development projects, including ones that foster gender equality and support education initiatives.
Strained by the pandemic, weary governments are now increasingly questioning the efficacy of foreign aid, which has long been criticised from both sides of the political spectrum. Under traditional aid delivery methods, donors resort to programs that amount to transfers to the general budget—as opposed to investment lending, which consists of funding for specific projects. With this approach, aid transfers are subject to leakages, including straight capture.
Criticism of these programs typically veers between two polar views: that of 'tied aid' and 'dead aid,' both of which have their own merits. Those who advocate for tied aid contend that aid is born of the self-interest of Western economies. Aid packages, the argument goes, are linked to projects that benefit donor countries and are therefore more likely to impoverish recipient countries than help them.
According to the alternative view of dead aid, foreign aid fuels dependency, corruption, and market distortions in recipient countries. Scandals about how COVID-19 relief funds have been misappropriated for other purposes have further shaken credence in foreign aid.
But there is a third approach to development aid, one that shields it from being captured by both donors and recipients. With this approach, money and services are given directly to citizens, thereby circumventing much of these critiques. Although this approach has been widely adopted in countries such as Brazil and Indonesia, it has yet to be scaled up for foreign aid delivery.
Direct aid relies on the use of cash transfer programs that condition payments on behavioural changes. This approach has had success in the past: Previously, transfers have been used to bolster poor families' income and encourage them to undertake socially beneficial behaviour, such as sending children to school. Development banks and nongovernmental organisations have also implemented these programs to reach vulnerable communities. During the Ebola crisis, an extensive cash transfer program in Sierra Leone and Liberia was able to support households in the most remote areas. These programs are, in fact, so well established that they are used as a benchmark to evaluate others against.
Circumventing governments in aid delivery is also a tried-and-true practice. The World Bank's International Development Association, for example, has crafted cash transfer programs that directly target refugees, bypassing governments to limit interference. More recently, after the 2020 Beirut port explosion, the World Bank's rescue package consisted mostly of direct cash transfers.
Since macroeconomic and sector reforms are key to facilitating economic development, donors should require recipient governments to undertake reforms in exchange for giving their citizens direct cash transfers. Governments that opt for the scheme would signal their responsibility and commitment to transparency. Because taxes can be levied on citizens' additional income, the direct transfer of money can help bolster demands for state accountability.
Bypassing recipient governments would also reassure donor countries that their aid is reaching its intended targets. Many governments in developing countries are often perceived, accurately, as bottomless pits. This perception is rooted in recipient governments' propensity to either first capture the aid or engage in patronage spending to buy votes. With direct payments, foreign aid would also be shielded from donor countries scheming to secure business contracts or access to resources.
For direct aid to work, governments and development institutions in recipient countries must invest in a new approach to aid delivery.
Critics of these cash transfer programs contend that they cannot replace infrastructure spending, they can encourage addiction, and they often attract politically motivated development partners. And they are right—but only in the long run. It is true that to better deliver foreign aid, policymakers and researchers must continue to identify ways of improving its long-term efficacy. But in the short run, developing countries need these direct cash transfer programs to alleviate poverty and help kick-start economic growth and recovery.
For direct aid to work, governments and development institutions in recipient countries must invest in a new approach to aid delivery—and partner with telecommunications operators and financial technology actors to establish the necessary infrastructure. Blockchain technology can make direct payments traceable and transparent, ensuring that the aid is used for development and entrepreneurship activities. Scaling up payments made through mobile phones will also help donors and development partners close the gap with impoverished regions. While these investments have significant immediate costs, they are outweighed by their long-term benefits: facilitating development and restoring trust in governments and donors.
The potential rewards of adopting this method of aid delivery could be enormous. Harnessing the technology necessary for direct payments can help develop the economies of scale necessary to address global health and education needs. Video technology on mobile phones and tablets, for example, can serve as a platform for telemedicine services and virtual lessons. There will still be a need for physical infrastructure—say, for surgeries—but the widespread use of telemedicine would be a major contribution to preventive care. Crucially, if development agencies can encourage the private sector to become involved in delivering social services at scale, then scaling up direct cash transfers will also improve medical and education services.
As the pandemic pushes countries to consider slashing their foreign aid budgets, donor countries must reconfigure how they deliver aid—not how much they give. The stakes are high. But with a global shift to direct payments, used in conjunction with technology, foreign aid can finally serve its intended purpose: helping the neediest citizens in poor countries to overcome major challenges ahead.
Rabah Arezki is a senior fellow at the Harvard Kennedy School. He previously held senior positions at the African Development Bank, the World Bank, and the International Monetary Fund.
Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement